Debt Relief or Debt Restructuring? Evidence from an Experiment with Distressed Credit Card Borrowers

This paper reports results from a randomized field experiment that offered distressed credit
card borrowers more than $50 million in debt forgiveness and over 27,500 additional months
to repay their debts. The experimental variation effectively randomized debt write-downs and
minimum payments for borrowers at eleven large credit card issuers. Merging information from
the experiment to administrative tax and bankruptcy records, we find that the debt write-downs
increased debt repayment and decreased bankruptcy ling. The debt write-downs also increased
formal sector employment for the most financially distressed borrowers. In contrast, we find little
impact of the lower minimum payments on debt repayment, bankruptcy, or employment. We
show that this null result can be explained by the positive short-run effect of increased liquidity
being o set by the unintended, negative effect of exposing borrowers to more default risk. We
conclude that debt relief is more effective than debt restructuring for distressed credit card
borrowers, even when these borrowers are liquidity constrained.
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